Question

The DeVille Company reported pretax accounting income on its income statement as follows: 2018 $ 355,000 2019 275,000 2020 345,000 2021 385,000 Included in the income of 2018 was an installment sale of property in the amount of $30,000. However, for tax purposes, DeVille reported the income in the year cash was collected. Cash collected on the installment sale was $12,000 in 2019, $15,000 in 2020, and $3,000 in 2021. Included in the 2020 income was $10,000 interest from investments in municipal bonds. The enacted tax rate for 2018 and 2019 was 30%, but during 2019 new tax legislation was passed reducing the tax rate to 25% for the years 2020 and beyond. Required: Prepare the year-end journal entries to record income taxes for the years 2018–2021. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Solution:

Computation of Taxable Income and Income Tax Payable
Particulars	2018	2019	2020	2021
Pretax accounting income	$3,55,000.00	$2,75,000.00	$3,45,000.00	$3,85,000.00
Less: Income from installment sale property	-$30,000.00	$0.00	$0.00	$0.00
Add: Collection of installment sales	$0.00	$12,000.00	$15,000.00	$3,000.00
Less: Interest on municipal bonds	$0.00	$0.00	-$10,000.00	$0.00
Taxable Income	$3,25,000.00	$2,87,000.00	$3,50,000.00	$3,88,000.00
Income Tax Payable	$97,500.00	$86,100.00	$87,500.00	$97,000.00
Computation of Deferred Tax
Particulars	2018	2019	2020	2021
Collection of installment sale as per tax return	$0.00	$12,000.00	$15,000.00	$3,000.00
Income from installment sales as per books	$30,000.00	$0.00	$0.00	$0.00
Taxable Temporary differences	$30,000.00	$0.00	$0.00	$0.00
Reversible Temporary differences		-$12,000.00	-$15,000.00	-$3,000.00
Deferred tax liability	$9,000.00
Reversal of Deferred tax liability 2019 = ($12000*30% + $18000*5%) 2020 - $15,000*25% 2021 - $3,000*25%		$4,500.00	$3,750.00	$750.00

Journal Entries - Deville Company
Year	Particulars	Debit	Credit
2018	Income Tax Expense Dr	$1,06,500.00
	To Income tax Payable		$97,500.00
	To Deferred tax liability		$9,000.00
	(To record income tax and deferred tax for 2018)
2019	Income Tax Expense Dr	$81,600.00
	Deferred tax liability Dr	$4,500.00
	To Income tax Payable		$86,100.00
	(To record income tax and deferred tax for 2019)
2020	Income Tax Expense Dr	$83,750.00
	Deferred tax liability Dr	$3,750.00
	To Income tax Payable		$87,500.00
	(To record income tax and deferred tax for 2020)
2021	Income Tax Expense Dr	$96,250.00
	Deferred tax liability Dr	$750.00
	To Income tax Payable		$97,000.00
	(To record income tax and deferred tax for 2021)